Ecology and economics share a common root: the Greek word oikos, meaning “home” or “a place to live”.
Oikos is an Australian environmental policy blog focussing on the connections between the environment and the economy.

Wednesday, February 08, 2006

Conservation vs logging: Battle of the dollars Part II

As I reported earlier, the Tasmanian Land Conservancy has purchased a large tract of land in Recherche Bay from its private owners, saving it from logging. What would environmental economics say about this development?

The ‘Coase theorem’ represents the traditional economic solution to environmental conflicts. Coase argued that if property rights are well-defined and enforced, bargaining between parties ensures that the optimal outcome is achieved, regardless of who holds the rights. According to one description of the theorem:

Many disputes over resources stem from the fact that no one owns them. Or -- nearly as bad -- everyone owns them, as in the case of public property. However, these disputes could be resolved if the unclaimed resources were divided up as private property. Now if someone wants to use your property, you could charge them a fee. Or if they abuse your property, you can sue them. Assigning property rights greatly enhances the ability to resolve disputes over the use and abuse of resources.

The Recherche Bay deal is perhaps an example of how this idea might work, sort of: environmentalists have gotten together money to buy an area of Tasmania’s historic Recherche Bay to protect it from logging by the notorious Gunns company. I’ve been following this story for a couple of months now and it’s been interesting. (Check out the reports in the weeks leading up to the deal on ABC news online.

I’m excited it’s succeeded but is it a triumph for free-market environmentalism? I’m not so sure. In my view, it’s succeeded despite the barriers to an optimal solution that a ‘free’ market throws in its way: a playing field that in this case is tilted against private conservation.

Here are some of those barriers.

Transaction costs

It’s a big deal for conservation groups to raise money from thousands of people to buy such an area. They need to advertise and lobby and beg and cajole to get it, they need to collect the money and hold it safely and issue thousands of receipts. They need to set up a trust to buy the land, work out how to manage it in perpetuity, work out who will negotiate with the landowner and so on.

Free-riders

If conservationists buy and save this area, who pays and who benefits? The generous benefactors pay, all sorts of other people benefit. I’ll benefit because I’d like to visit there one day and I’d like it there to be trees there when I do. I’ll benefit just from the warm inner glow I get knowing that a special place won’t be logged. Neighbouring residents benefit from. Historians and people of French and Australian heritage benefit from being able to visit or perhaps just watch a documentary about an unusual place where the French explored and almost made a decision to colonise Australia.

But will all these people pitch in their $5 or $10 or $100 to save the area? Not likely. Many of the beneficiaries may not even be aware of the benefits they receive. So it could well be that preserving this area is worth well in excess of the amount that conservation groups can raise.

Tax treatment

Tax treatment for conservation in Australia is complicated. It is improving, but there are many aspects of buying land for conservation that are not tax deductible. Donations to the trust that buys it will be, but payment for the land won’t (I think) nor the ongoing cost of managing the land for conservation.

So a group of conservationists face high transaction costs, free rider problems and difficult tax issues. On the other hand, where one logging company wants to buy the land to log it, it faces much lower transaction costs (only one party to organise and negotiate), very few free riders (it pays but also keeps the profits) and using land for primary production attracts very concessional tax treatment.

The property rights solution works sometimes but usually there’s too many embedded biases for it to produce an optimal outcome on its own.

In a later post I’ll talk about ways we can reduce some of the barriers to private conservation.

2 comments:

Here's another question for you Davo.You'll notice that in the list of beneficiaries was Gunns Ltd, an economically successful logging company. They were paid approximately $200,000 due to losing the opportunity to log the area (this is what the Vernon family paid them in order to break a contractual agreement). With this information is is apparent that Gunns Ltd will enter into many new contracts to log contentious areas, perhaps of comparable value to Recherch Bay. What is to stop the state government from paying millions of dollars of public taxes to this private entity simply for them to relinquish the 'right to log'? Should it not be that a private entity should pay the public for them to forgoe the 'right to clean drinking water' and related benefits from intact ecosystems.

I guess the enviro-economists would argue that we haven't yet put a price on ecosystem services and therefore they are financially worthless?

I think most economists would argue that you do need to make a logging company financially responsible for the costs it imposes on others by logging an area - either, as you suggest, by establishing some kind of right to a clean and intact environment that Gunns should compensate the community for if it violates, or by placing a 'price' on an intact ecosystem and not implicitly valuing it as 'free'.

I'm not sure how much these things occur in practice in Tassie but in my view the granting of permission to log private land should be conditional on rehabilitating the site and compensating the community (through a tax, fee or through compensatory environmental works elsewhere) for the damage to catchments etc. For logging on public land, where the community considers it appropriate for logging to occur, there should be additional compensation to the community for the lost opportunity to use the area for alternative uses.

About Me

David works as a lawyer in a government environmental agency and is studying a Masters in Environmental Economics, currently writing a thesis on the application of prediction markets to climate change.
He lives in Sydney with Catherine.